Dipping and averaging down—is that right?

In investing, many people follow a simple investment approach: average down when prices drop, sell when prices rise. They believe this strategy is foolproof because averaging down lowers their average cost, and once the average cost is lowered, they don't need the price to return to the original level to break even—theoretically, as long as prices keep dropping and they keep averaging down, any slight rebound might allow them to break even or make a profit, then they sell and start the next cycle.

This method is somewhat similar to the martingale strategy used in casino betting. However, this strategy is not a "guaranteed winning method" because its key depends on choosing a target that "will rebound sharply when it does bounce back." If you pick the wrong target, then your averaging down is wrong—the more times you average down, the more wrong you become.

Can averaging down lower your average cost? Perhaps we shouldn't look at it that way, because the so-called "lowering average cost" actually involves two separate actions: 1. You buy a target at a new cost; 2. You combine the new cost with the old one and calculate an average cost. Only the first action actually affects your profit and loss, while the second action is merely a shift in calculation perspective—even if you don't make that shift, it won't affect the result. Therefore, we should only focus on the first action.

If after you average down, the target continues to fall, from the perspective of "the percentage gain needed to break even," even if it keeps falling, averaging down does get you mathematically closer to break-even than not averaging down, right? So you think averaging down must be correct. But here's the thing: we just said the second action isn't something we need to focus on—it doesn't truly affect your profit and loss. When prices continue falling, your first investment will keep losing money regardless of whether you average down afterward, won't it? Therefore, we only need to look at the money you subsequently averaged down with. You'll find that if prices continue falling, this money is also losing money. So even though the percentage gain needed to break even shrinks, your actual capital is, because of this averaging down, genuinely losing more—the loss on your first investment has its own trajectory, unaffected by whether you make a second purchase, but you've added additional real losses from the second purchase.

Therefore, the "averaging down to lower cost" perspective is incorrect. The correct way to judge should be: "At the current price, with my current view of this target, should I make an independent trading decision? If yes, do it; if no, don't."—not "since the current price is lower than my previous cost basis, I must buy."

I know that many people's views on targets are heavily influenced by online opinions, people around them, and whether the market is continuously rising or continuously falling—this is wrong. Because you're trying to make money from "the market being wrong." If your views always follow "the current market's view," then the market will always be right from your perspective. If the market is always right, how can you trade against it? If your relationship with the market isn't contrarian trading, where does your profit come from?

So you should buy a target not because it's good (good targets don't necessarily rise), but because you've detected that "the market is wrong"—either it's good but the market thinks it's not, or the market's capital lacks long-term patience; or the market also thinks it's good, but you believe it's far better than the market thinks.

When the price continues to fall, your view of the target's value must remain unchanged. At this point, the price falling means it's deviating more and more from its "proper value"—this should be your reason to buy now, not that you bought too high or too low last time, or that you need to average down to make it look closer to break-even.

This is what I mean by "investing the right way." If you're on the wrong path, no matter how brilliant a strategy you develop, you're just polishing a turd. After 10, 20 years of investing, your skill level won't improve at all. But if you're on the right path, have the right concepts, then you don't need to be particularly smart—success is just a matter of time. #Gate13周年全球庆典